Companies & Industries

A new threat for big grocery: AmazonFresh

Amazon’s delivery service is growing

(Joe Nicholson/AP)

(Joe Nicholson/AP)

The big acquisitions made by Loblaw and Sobeys this summer suggest grocers are furiously bulking up to fend off competition from American retailers such as Walmart and Target. But they may also be watching a different threat on the southern horizon.

Since 2007, Amazon has been offering an online grocery and delivery service in Seattle called AmazonFresh. This past June, the company expanded to parts of Los Angeles, and it’s rumoured that it will push into 20 urban areas next year, some of them outside of the U.S. Observers note AmazonFresh isn’t about boosting profitability for the world’s premier e-tailer but a way to get inside customers’ homes more frequently, in hopes of selling them more high-margin goods.

The company has also spent the past few years building distribution centres to reach urban markets with its own fleet of trucks to ensure same-day delivery. Amazon already has fulfilment centres outside Toronto and Vancouver. Given the way it has crushed other retailers, grocers should be worried.

“It doesn’t take much reduction of volume in stores, which have a lot of fixed costs, to cause quite a lot of fallout for the industry,” says Paul Beswick, head of the North American retail practice at Oliver Wyman. The consulting firm put out a brief recently speculating that at least one in eight supermarkets in the U.S. could ultimately close as a result of AmazonFresh’s rollout.

Online grocery shopping is not new, but it has only taken off in places like the U.K. that have a combination of high fuel costs and high residential density, which make driving to the supermarket less appealing and the economics of home delivery more feasible. That isn’t the case in Canada, by and large.

It’s also a difficult business to perfect. Just ask Stephen Tallevi, who co-founded Grocery Gateway in 1997 and nearly went out of business before it was purchased by Longo’s in 2004. “You have thin margins, and you’re putting on top of it a very complex, costly logistical component, and to make it work properly and make a profit is a challenge,” he says. Grocery Gateway now has 40,000 active customers in the Greater Toronto Area.

For these reasons, traditional grocers have so far been reticent to sell online, but “that’s all going to change very soon with Amazon,” Tallevi says. Sobeys et al. have some advantages when it comes to building online branches before Amazon arrives, such as consumer trust, loyalty and established brands. But Amazon has shown before an ability to enter a sector and chip away at the incumbents’ market share. Says Tallevi: “If a player like Amazon comes in, I’m sure we’ll feel it.”